(Updates with comments from FX Concepts’ Taylor in fourth paragraph. See EXT4 <GO> for more on the Link Conference.)
Jan. 24 (Bloomberg) -- The European Central Bank’s unlimited three-year loans to financial institutions are helping move the region toward a solution to the debt crisis, said Erik F. Nielsen, global chief economist at UniCredit SpA.
“We have turned the corner,” Nielsen said today at the Bloomberg Link conference in New York. ECB policy makers are “doing what they have to do” by providing additional funding, he said.
Italian and Spanish government bonds have rallied since ECB President Mario Draghi said on Dec. 8 that policy makers would lend banks as much money as they needed for three years in tenders held in December and February. The euro weakened 2.6 percent against the dollar in the period.
“Mario Draghi has really hit a home run” in helping the economy, John Taylor, the founder and chairman of New York-based FX Concepts LLC, said at the conference. Because of the loans, “I would expect the euro to weaken for no other reason than the fact there are so many euros out there,” he said. The euro may drop to parity with the dollar by year-end, Taylor said.
The ECB loans are a form of quantitative easing and the euro is destined to slide, Taylor said in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker on Dec. 21.
“This is QE in another form,” Taylor said in the December interview, referring to the monetary policy used by the Federal Reserve to keep long-term rates low. “Three-year money at a low price -- you can give it back after a year -- it’s a giveaway. What scares me is what the hell are they going to do with it? They’ll buy Spanish and Italian debt.”
The weaker euro itself may help bolster the region’s economy, Julian Callow, head of international economics at Barclays Capital, said at today’s conference.
“You actually have to have that to offset the fiscal tightening,” Callow said. “The euro has quite a lot of downside potential here. Fair value is more like $1.15. The mystery is really that the euro has been so firm for so long.”
The euro was little changed at $1.3014 as of 5:09 p.m. London time.
Italian bonds earned 6.5 percent and Spanish debt returned 5.1 percent since Dec. 8, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The ECB provided 489 billion euros ($636 billion) in three-year cash to banks on Dec. 21, and will offer funds at that maturity again on Feb. 28.
--With assistance from Robert Burgess in New York and Matthew Brown in London. Editors: Daniel Tilles, Nicholas Reynolds
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